QUESTION
We make loans exclusively to servicemembers. In our recent banking department audit, we were told we do not have sufficient protection to avoid fraud in our payment app. This app was launched a couple of years ago, and we did not think there was a problem.
Until, that is, the CFPB contacted us about getting a consumer complaint about it. We found out that a group of fraudsters had copied the way our payment app looks and acts, which caused servicemembers to be lured into fraudulent transactions.
The result of that complaint was a big update to the payment app, adding a lot of additional consumer requirements to do transactions. We constantly monitor the payment app and have updated our monitoring and testing procedures.
We still don't know the extent that the complaint affected our business. Being a lender to servicemembers, we want to ensure that our payment app is fully capable of ferreting out fraud. We hope you can provide some insight into how payment apps cause fraudulent transactions.
What challenges do servicemembers face due to fraud caused by payment apps?
How can we ensure that our digital payment app protects servicemembers from fraud?
ANSWER
There has been a steady increase in the use of digital payment applications ("app(s)") in the servicemember community. The Consumer Financial Protection Bureau (CFPB) has been very active in protecting servicemembers from fraudulent transactions caused by digital payment apps.[i]
Servicemembers have unique financial risks associated with these services with respect to potential abuse from bad actors. Some servicemembers have also complained that they have incurred serious financial harm from scams and fraud when using these services, and their complaints suggest digital payment app providers often fail to provide timely and substantive resolutions.
Payment apps allow a consumer to send money to another person without needing to write a check, swipe a physical card, or exchange cash. Depending on the provider, a payment app transfer can be initiated from a consumer's online bank account portal, prepaid account portal, or mobile app.
The onset of the COVID-19 pandemic in the spring of 2020 led to a significant increase in the adoption and usage of payment apps (both bank and nonbank). According to an analysis of data collected in the 2019 and 2020 Federal Reserve payment study, in early 2020, the number of accounts with first-time payment app activity surged by almost 18% from the first quarter to the second quarter of 2020; growth in the number of accounts with activity similarly rose at a high rate of 12.4% over the same period.
Consumer Complaints
In 2022, of all the complaints submitted to the CFPB regarding payment apps, the most common complaints were fraud-related. Other federal agencies have reported similar growth, particularly between 2018 and 2021. Additional research using internal banking data has shown that fraud is a growing problem in this market that often leaves the consumer with little or no recourse.
One common type of fraud is induced fraud. You may not have heard this term before, but it is a popular play used by fraudsters. "Induced fraud" occurs when a consumer is tricked into sending money to a fraudster or otherwise unwittingly facilitating a transaction, generally because the fraudster misrepresents their identity.
Unauthorized transfers are also a growing issue seen in CFPB complaints. This type of transaction can occur when the user's payment app account is accessed without their permission, and money is transferred out. Sometimes unauthorized transfers result from a consumer being tricked into providing their login credentials or their credentials being taken fraudulently.
Servicemembers, veterans, and their families have submitted more than 323,000 consumer complaints since the CFPB opened its doors in 2011. In 2022, they submitted more than 1,100 complaints about digital payment apps, which makes this one of the fastest-growing complaint types submitted to the CFPB. Many reported issues and complaints about digital payment apps relate to frauds and scams, suggesting it is a rapidly growing financial threat to military families.
Financial Risks to Servicemembers
The financial risks to servicemembers and their families who use digital payment apps are considerable. Here are the top three that the CFPB has determined.
1. Serious financial harm from fraud and scams when using digital payment apps.
During a permanent change of duty station, servicemembers often face the need to secure housing, a new automobile, or daycare during a short window, which usually requires them to conduct more online transactions using digital payment apps. Servicemembers' complaints concerned being scammed online using payment apps, which affected their overall financial stability; indeed, such consequences may impact servicemembers' ability to continue service or keep a security clearance.
2. Identity theft and unauthorized account access.
Servicemembers' steady income may make them a target for identity thieves looking to tap into bank accounts often linked to a digital payment app. The CFPB has received complaints about servicemembers having their identities stolen, followed by unauthorized money transfers from their digital payment app accounts.
3. Digital payment app providers fail to provide timely and substantive resolutions to servicemember complaints.
Complaints indicate that servicemembers and veterans who lost money due to unauthorized transfers still struggle to get their money back due to digital payment app providers failing to provide timely and substantive resolutions.
Financial Protection for Servicemembers
Protecting servicemembers from fraudulent transactions involving payment apps takes several forms.
· Improve the safety and security of your networks to prevent fraud.
As a provider of a digital payment app, you can improve the overall safety and security of this app by investing in privacy and security technology and by preventing, identifying, and limiting fraudulent activity, including detecting and removing repeat offenders from your systems.
· Improve their responsiveness if fraud does occur.
When fraud involves multiple entities, financial institutions and digital payment app providers should coordinate more closely to resolve fraud-related problems quickly. By helping to expedite the process, they can help reduce the time that someone must wait to access locked funds or to reclaim funds. For military families, accessing these funds can be particularly critical during a permanent change of station or deployment.
· Customize refund policies for fraud losses that recognize the unique experiences of military families.
Servicemembers experiencing fraud on digital payment apps may be unable to recognize or respond to fraud quickly. Digital payment app providers should identify these challenges and take a comprehensive approach to reimbursement when all types of fraud occur.
Chairman & Managing Director
[i] Office of Servcemember Affairs Annual
Report, January-December 2022, Issued June 2023, Consumer Financial Protection
Bureau
